CFG

Good morning everyone, welcome to the Citizens Financial Group second quarter 2026 earnings conference call. My name is Ivy and I will be your operator today. Currently, all participants are in a listen only mode. Following the presentation, we will conduct a brief question and answer session. As a reminder, this event is being recorded. I will now turn the call over to Kristen Silverberg, Head of Investor Relations. Kristin, you may begin.

Thank you, Ivy. Good morning everyone, thank you for joining us. First this morning, our Chairman and CEO, Bruce Van Saun, and CFO, Aunoy Banerjee, will provide an overview of our second quarter results. Brendan Coughlin, our president, and Ted Swimmer, Head of Commercial Banking, are also here to provide additional color. We will be referencing our second quarter presentation located on our investor relations website. After the presentation, we will be happy to take your questions. Our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review in the presentation. We also reference non-GAAP financial measures, so it's important to review our GAAP results in the presentation and the reconciliations in the appendix. With that, I'll hand it over to Bruce.

Thanks Kristen, good morning everyone. Thanks for joining our call today. We announced outstanding results for the quarter as our strong momentum continues. EPS growth was 15% sequential quarter, 41% year-on-year, and our ROTCE improved to 13.9%. Our performance was powered by significant revenue growth. NII was up 4.4% sequentially and 14% versus a year ago, which was paced by continued NIM expansion and accelerating loan growth across each of our businesses. Fee revenues were up 8% sequentially, 9% year-on-year as our capital markets hit a second quarter record, wealth hit an all-time high, and various payment-related revenues had a nice seasonal bounce. We maintained strong expense discipline, which resulted in positive operating leverage of 4% sequentially and 6.4% year-on-year.

Credit continues to trend favorably as we continue to shift originations into portfolios with deep relationships and lower credit risk while continuing to run down non-core and CRE portfolios. Our balance sheet remains robust across capital, liquidity, funding, and credit allowance. We were pleased about the DFAST stress loss results, and we anticipate further improvement under the new Fed models. Our key initiatives are progressing well. The private bank continued its consistent growth with spot deposits of $17.8 billion, loans of $9.7 billion, and client wealth assets of $11.2 billion. We continue to attract some really great talent, we continue to broaden out and strengthen our capabilities. The business now contributes 11.5% of Citizens' pre-tax income while maintaining an ROE of around 25%. Reimagine the Bank is moving along nicely.

We are excited about how several of our early AI deployments are having real impact on how we operate and how we serve customers. We're also attracting some great talent into the Commercial Bank, given our strong position in the market, our focused strategy, and our outstanding culture. We maintain strong deal pipelines and anticipate that higher activity levels can extend well beyond this year. We are continuing to refine a branch optimization strategy in consumer, which we have named NEXT, or Network Evolution and Experience Transformation. The objective will be to add specialists in select branch locations and to enhance our branch locations to achieve faster retail household and deposit growth over time. We are quite excited by this. We've shared a page in the slide deck that provides more details.

We feel good about our outlook for the remainder of 2026 and feel we are set up for strong performance over the medium term. We have a distinctive strategy focused on a growing consumer bank, the commercial bank of choice, and the premier private bank and wealth platform. Our talented leadership team is focused on further building up these businesses, leaning into the areas where we have a right to win, and driving strong execution. With that, I'll turn it over to Aunoy for the financial details. Aunoy?

Thanks, Bruce. Good morning, everyone. As Bruce mentioned, we delivered strong second quarter results. Record revenue performance and expense discipline drove more than 600 basis points of positive operating leverage year-over-year. Referencing slides three and four, we delivered EPS of $1.30 for the second quarter, a $0.17 or 15% improvement over the first quarter. We saw solid improvement in ROTCE to 13.9%, up from 12.2% in the first quarter. Results reflect strong NII performance with continued net interest margin expansion and loan growth picking up across all three businesses and exceeding expectations. We also delivered better than expected fee growth for the quarter with continued capital markets momentum and a seasonal pickup in payments-related revenues across card and treasury solutions being the main business drivers.

Importantly, we are executing well against our strategic initiatives, including the build-out of our private bank and our Reimagine the Bank program, which is progressing well. As Bruce said, the private bank delivered another standout performance, contributing $0.15, up $0.04 from the prior quarter, representing 11.5% of total EPS. We opened our 10th private bank office, adding West Palm Beach this quarter, and we continue to attract top-quality wealth advisors to the platform. With respect to our balance sheet, we continue to maintain robust capital, strong liquidity levels, and a healthy credit reserve. We ended the second quarter with CET1 at 10.4%, while executing $225 million in stock buybacks during the quarter. Turning to slide five.

I will discuss the second quarter results in more detail, starting with net interest income, which was up 4.4% linked quarter given the increase in interest-earning assets and higher net interest margin. Our net interest margin continued to expand this quarter, increasing three basis points linked quarter or a combined 10 basis point lift through the first half of the year. The time-based benefits from terminated swaps and non-core runoff contributed six basis points this quarter, and fixed rate asset repricing added another basis point. Funding costs ticked up slightly as loan demand strengthened through the quarter across each of the three businesses. Importantly, though, we saw solid growth in DDA and other low-cost deposits, which helped mitigate the increase in overall deposit costs. We also had an increase in FHLB funding during the quarter to help support the stronger than expected loan growth.

We continue to do a good job on optimizing deposits in a competitive environment. Our interest-bearing deposit costs were up four basis points, and total deposit costs were up three basis points, reflecting the good DDA and low-cost deposit growth. Our cumulative interest-bearing deposit beta met our expectations at 48%, as the Fed continued to hold rates steady. Moving to slide six. Non-interest income is up 8% linked quarter and up 9% year-over-year. This was a strong fee result, notwithstanding the continued market volatility associated with heightened geopolitical tensions. The capital markets momentum continued to pick up, delivering our strongest second quarter ever, with fees up 14% compared with the strong first quarter and up 46% year-over-year. Loan syndications and bond underwriting drove the outperformance this quarter. Both equity underwriting and M&A delivered good results in the quarter, with performance broadly stable linked quarter.

M&A fees were up significantly year-over-year, and our pipeline is strong and continues to build. We continue to maintain strong market share, ranking as the second middle-market sponsored book runner by number of deals and volume. This is for both the second quarter and over the last 12 months. Wealth delivered another record quarter, with AUM growth in the private bank and in our retail network, as well as a positive markets impact. Wealth fees were up 2% linked quarter and 16% year-over-year. Service charges and fees were up $5 million, driven primarily by seasonality and new commercial clients driving growth in account and cash management fees. The card business also delivered a strong quarter, up $6 million, driven by a seasonal improvement in purchase volumes. On slide seven, expenses were managed tightly, up about 1% linked quarter, and we improved our efficiency ratio to 61%.

Second quarter results include implementation cost of about $7 million for the Reimagine the Bank program. Moving to loans on slide eight. Average loans were up 2% linked quarter, and period-end loans were up 3%, with loan growth across each of the businesses. The private bank period-end loans were up $1.9 billion this quarter, reflecting higher commercial line utilization and strong originations in high-quality residential mortgage and multifamily lending. Spot commercial loans, excluding the private bank, were up $1.5 billion, or 2% linked quarter. The commercial growth was driven by C&I with net new money originations in corporate banking and higher line utilization across both corporate banking and our sponsor business. This was partially offset by continued planned reductions in CRE, primarily more driven by multifamily and general office paydowns.

Importantly, the C&I growth was fairly broad-based, with the pickup in loan demand reflecting a positive backdrop for corporate clients with new investment and increased working capital needs. We are adding new clients and seeing new borrowings from existing clients, primarily across technology, healthcare, energy, and the FIG sectors. Private credit funds are actively utilizing facilities as we grow our lead role in these relationships. We also saw some CRE paydowns push into Q3. Growth in retail loans ex non-core on a spot basis was about $800 million, led by real estate secured categories. This was partially offset by the non-core auto portfolio runoff of roughly $400 million for the quarter. Next, on slides nine and 10. We continued to do a good job on deposits, with average deposits up 1%, or $2.3 billion linked quarter, primarily driven by the growth in the private bank and retail.

Spot deposits were up $1.6 billion, driven primarily by the private bank, which reached $17.8 billion in deposits at the end of the quarter. Commercial also contributed to the period end growth. Our consumer deposits represent 64% of our total deposits, steady with prior quarter. This compares favorably to a peer average of about 56%. Total non-interest bearing and low-cost deposit mix was broadly stable at 42% of total deposits. Moving to slide 11. Credit continues to trend favorably, with net charge-offs coming in at 37 basis points, down from 39 basis points in the prior quarter. Non-accrual loans are down 4% linked quarter, driven by a decrease in commercial real estate as we continue to work out the general office portfolio.

As Bruce mentioned, we are pleased with the results of this year's Fed stress test, which projected a credit loss rate that ranks third best amongst our regional bank peers. This is reflective of the work we have done to improve our balance sheet mix, running down the non-core portfolio and commercial real estate while growing higher quality relationship-based lending across the private bank, commercial, and residential retail. Turning to slide 12. The allowance was stable this quarter with ACL coverage ratio at 1.48%, reflecting the continued improvement in our portfolio mix with the continued non-core runoff, the reduction in the commercial real estate, and strong originations of lower loss content C&I, residential real estate secured, and private bank loans. As we look broadly across the portfolio, the credit outlook remains positive, though we continue to carefully monitor the macroeconomic environment. Moving to slide 13.

We maintained excellent balance sheet strength, ending the quarter with CET1 at 10.4%. We dipped slightly below our 10.5% target as loan growth accelerated during the quarter and exceeded expectations. We returned about $422 million to shareholders in the second quarter, with $197 million in common dividends and $225 million of share repurchases. This makes a total of $920 million returned to shareholders through the first half of the year. Moving to slide 14. The private bank continues to make excellent progress. The private bank delivered strong deposit growth again, ending the quarter at $17.8 billion. Importantly, the overall deposit mix and cost continues to be very attractive. We also delivered solid loan growth in the quarter, adding $1.9 billion of loans, driven by increased commercial line utilization and strong originations in residential mortgage and multifamily to end the quarter at $9.7 billion of loans.

The portfolio maintains a healthy spread of approximately 4% over deposit cost. Client assets increased by about $1 billion to end the quarter with $11.2 billion of total client assets. We added another strong wealth team in Southern California this quarter, and we plan to continue adding top quality teams in key geographies. We also opened a private bank office in West Palm Beach, our tenth. Moving to slide 15. Our Reimagine the Bank program is progressing well. The objective is to position Citizens for long-term success by embracing a host of new and innovative technologies across the bank and simplifying our business model. This will reshape our customer experience and drive a meaningful improvement in productivity and efficiency.

Several key work streams are well underway, and we expect to hit our financial targets for the program with a minimal net cost for 2026 as we realize quick wins to cover implementation costs. We expect to exit 2026 with about $100 million of annualized pre-tax benefit, doubling that in 2027 and reaching about $450 million as we exit 2028. On slide 16, we have an overview of our Network Evolution and Experience Transformation, or NEXT for short. This focuses on accelerating consumer household and deposit growth while increasing revenue opportunities across our branch network. After creating a more efficient retail branch network over the last 10 years, we are embarking on a long-term initiative to now further optimize our existing network. The focus will be on eliminating approximately 100 to 120 in-store branches. We will add some standalone advisory and business banking-focused branches, including selective branch consolidation and upgrades.

We also aim to gain more density in high opportunity core markets through self-funded de novo branch expansion at a measured pace. A key element of NEXT will be to add specialist talent in select branches with a focus on small business and wealth. The financial impact of this program is expected to benefit the medium term while not impacting our path to achieving our 16%-18% ROTCE target. Moving to slide 17. We provide our outlook for the third quarter, which contemplates the Fed holding rates steady. We expect net interest income to be up in the range of 2.5%-3.5%, driven by continued expansion in net interest margin and earning asset growth. Non-interest income is expected to be up approximately 1%, led by capital markets and wealth. We are projecting expenses to be stable to up slightly.

The charge-off level is expected to be stable to down slightly, and we should end the third quarter with CET1 at approximately 10.5%, including share repurchases of about $125 million. For our full-year outlook, we are tracking favorably against the guidance provided in January. Revenue is trending above our initial guidance range, which combined with expense discipline, puts us on track to deliver over 600 basis points of positive operating leverage for the full year. Looking out further, we see a clear path to achieving our 16%-18% ROTCE target by the end of 2027. We continue to improve our net interest margin, adding 10 basis points in the first half of 2026, and we project to deliver a full Q2026 NIM in the range of 322%-327% and in the range of 330%-350% in full Q2027.

Slide 18 provides incremental details on our net interest margin progression to the end of 2027. The projected margin expansion, combined with the increased contributions from the private bank and the diversified capital markets business we have built, as well as normalizing credit, should drive our ROTCE to the target range of 16%-18%. To wrap up, we delivered a strong second quarter result, highlighted by record revenue and a robust level of positive operating leverage. We have a positive outlook for the rest of the year with good momentum across our businesses. We will continue to focus on driving forward our strategic initiatives and delivering for our shareholders. With that, I will hand it back over to Bruce.

Okay, Aunoy. Thank you. Operator, let's open it up for Q&A.

Thank you, Mr. Van Saun. We are now ready for the question and answer portion of the call. At this time, if you would like to ask a question, please unmute your phone, press star one and record your name clearly when prompted. If you need to withdraw your question at any time, you may press star two. Again, that is star one to ask a question. Our first question comes from the line of Ryan Nash from Goldman Sachs. Please go ahead.

Morning, everyone.

Hi, Ryan.

First, just a congrats to Brendan on the expanded responsibilities. Bruce, I hope you are still celebrating the Knicks victory like I am.

Very enjoyable. It's got a lasting taste to it.

You are telling me. Maybe to kick it off, deposit costs were up four bps in the quarter, and you highlighted that a portion was driven by the private bank, given an influx of growth. Can you maybe just talk about your deposit cost expectations from here relative to the high 40s beta that you've been targeting, and what does all this mean for the trajectory of your margin and maybe where you're tracking relative to both year-end and the long-term ranges? Thank you. I have a follow-up.

Yeah, sure. I would say the kind of deposit cost number and deposit growth is going to move around a little bit from quarter to quarter. There's going to be seasonal factors. Typically, our strong quarter is Q4, particularly in commercial, when we get a significant amount of deposit growth. If you look at the kind of year-over-year spot deposit growth, it's up 6%. In the second quarter, it tends to be a little lighter. I'd say there was a bit more loan growth than people expected coming into the quarter, which might have caused deposit competition to increase a little bit. I think that likely just evens out. I don't think it's a trend that we're all that concerned about, we'd still kind of hold our view that deposit betas will be likely to be stable from here.

It could be that the cycle ends if the Fed goes to a hike. At this point, I think we'll be on hold for a reasonable period of time. In any case, I think we're managing that impact. We're still showing positive NIM progression. We do have time-based benefits that really helps kind of distinguish us versus others when we look out to the second half of the year. I think we have confidence in the outlook around DDA and low-cost deposit growth even accelerating a bit in the second half of the year. We feel taking all things into account, we're not that concerned about a slight uptick in the deposit cost for Q2. Aunoy, do you want to add anything to that?

Yeah, Ryan, it's Aunoy here. I would say if you look at for the second half, as you saw in the first half, we did almost 10 basis point of NIM expansion. In the second half, if you look at on page 18, we've got seven basis point of terminated swap impact and a couple of basis point of front book, back book. We have got nine basis point. That's a nice increase, that puts you at the higher end of our 4Q range. As Bruce said, we have good line of sight on good DDA growth, we continue to rotate loans into higher earning assets. We feel good about where we are. Also we have a very disciplined hedging program, we continue to hedge our any downside risk. We feel good about our NIM ranges from here.

Got it. No, that's great. Maybe just to build on that, two quick follow-ups. The slides reference you thought you'd be above the high end of the 10-12 guide. Maybe can you put a finer point on that? Given the strength in NII growth and further margin expansion, do you think you can maintain these type of NII growth rates at least through 2027? Thank you.

Yeah. We don't usually give specific guides on the full year outlook, just a kind of broad update. I think if you look at where consensus is and what we just posted in the second quarter plus the third quarter guidance, we would tend to move past consensus. We'd be higher than where consensus is, which is already, I think, at 12.2 or 3 or something like that. Other than that, there's a lot to play out. I don't want to be too specific on it other than we feel good about the trajectory for NII coming from both NIM expansion and loan growth continuing into the second half of the year. We also feel good about the fee trajectory as well, where we think we'll come at the high end of the range there as well.

With respect to 2027, I think it's a little early to call that. We'll give you obviously the full guidance in January, but at this point objects in motion tend to stay in motion. We think the economic backdrop is going to be supportive for 2027. We should continue to see reasonable levels of loan growth. We just talked about the slide about the drivers that will continue to allow us to expand the net interest margin.

The only thing that I would add also is we also delivered 600 basis points of operating leverage, and you saw our ROTCE tick up to 13.9% this quarter. We expect the ROTCE to just keep ticking up as we go through the year.

Thanks for the color.

Okay. Thank you, Ryan.

Next, we'll go to the line of Erika Najarian from UBS. Please go ahead.

Hi. Good morning. I'm actually now going to reframe my question because it seems like you're keen on what consensus movements could be. Obviously, all good guides in terms of the NII upgrade and fees. Expenses slightly higher given strong revenue performance. Obviously, the operating leverage is widening from the 500 to the 600. Bruce and Aunoy, if you think about what the expectations are on the Street, do you expect a PPNR upgrade relative to what you're expecting? I think if we do back of the envelope math, if you'd go conclude anywhere from no upside to PPNR to 3% upside to PPNR.

Yeah. I think the guide is very solid. We wouldn't be surprised to see PPNR move up a bit. I would say on expenses specifically, I don't really have any concern, nor do I think investors should have any concern at all that we're viewing the positive operating leverage as an opportunity to go double down and start spending a lot of money. The slight, and I emphasize the word slight, increase in expense is really just additional incentive compensation for paying our people for delivering significantly higher revenues than at the high end of the range or higher. Things like that, you got to pay people. If that number moves up slightly, that's a good thing. It's tied to revenue production, and it was still resulting in an increase in positive operating leverage for the year relative to the beginning of year guide.

My follow-up question, thank you for that, Bruce, is, Anoy, you mentioned that you did take on more FHLB given the gap between loan growth and deposit growth. Maybe talk to us about sort of your strategy at the end of the year. You mentioned holding the line on deposit costs. So what is sort of the math that you're doing as you're thinking about the FHLB advance draws versus having a more attractive deposit rate? Is the timing of the fourth quarter strength sort of a consideration in terms of the maybe temporary FHLB strategy? I'm sorry for the compound question, Ryan started it, so I might as well follow through. If we do get a rate hike, which is not contemplated in your guide, what do you expect for your asset sensitivity generally and for deposit beta specifically?

Wow. There's a lot of questions you packed into that one, Erika.

Sorry.

I'm going to just finish off a little bit since it related to the Ryan question. Again, I mentioned there's kind of seasonal patterns in deposit growth. So we borrowed a bit of money in the second quarter in FHLB. I think that ultimately drops out or drops to lower levels as we get into the second half of the year, and we would expect to see more robust deposit growth, particularly in Q4. Anyway, just to that specific question, that's how we see it. We're still at very modest levels of FHLB advances. We're almost entirely, and we have been for several quarters, entirely deposit funded, which I think is a real strong suit and shows our incredible liquidity and funding position relative to our peers. Anyway, I'll turn it back over to Aunoy.

I think, Erika, just to add to Bruce's point, I think we are seeing some good deposit trends underlying our businesses. If you think about the private bank, it has grown nicely. As you know, the private bank comes with almost 30% DDA and over 50% as a DDA plus CDs. That's a nice growth that we are seeing that is quite unique to us in a good way. Also in the consumer bank, we are seeing a good DDA growth. We are seeing good checking account growth. We are seeing checking balances per household grow in our affluent and mass affluent segment. We are seeing nice deposit trajectory. As Bruce mentioned, with the commercial bank coming in seasonally higher in the fourth quarter, we expect deposit growth to continue for here.

To your point on asset sensitivity, look, I think we have always been slightly asset sensitive. We continue to be that, and we have hedged our downside risk as well. We remain a little bit asset sensitive. As rates go up, if they go up, it will be a more of an impact in 2027 as some of the hedges amortize. It would be a good tailwind to have in the front.

I would say on the slide where we show you that cone in the deck, Erika, the fact that the macro outlook seems pretty stable and the rate outlook seems pretty stable for the next 18 months. You might see a hike or two up or eventually a cut one or two, but not moving that far off of where it is. A lot of the kind of downside risk in particular, if rates get cut a lot, seems to be reduced. It basically means that the time-based fixed asset repricing and then our own balance sheet dynamics, how we're managing the low-cost growth, how we're rotating capital out of loan portfolios today into more attractive loan portfolios in the future. That helps determine that NIM trajectory more and more with less kind of a wild card coming from the external rate environment.

Thank you.

Okay.

Next, we'll go to the line of Matt O'Connor from Deutsche Bank. Please go ahead.

Good morning. Bruce, I am just hoping to ask about succession, given some of the media articles out there that have been covering the topic of late.

Sure. I have undertaken a kind of very considerate process to make sure that the team that got us to this point, we have had a tremendous run. Stock is up over three times since the IPO. The bank has been transformed. Some of those folks on my team have hit retirement, and I have brought four new folks onto ExCo last year, and we promoted Ted to run commercial when Don McCree retired.

I think Brendan has demonstrated great leadership qualities, and we made him president last year. Under a consistent basis, we are continuing to broaden his remit so he sees more of the bank and he can be tested, but also just gain in knowledge. I think he is doing a great job. This new tucking commercial under is another chance to broaden kind of what he understands about the bank. I am in no rush to go anywhere.

I feel lots of energy and really have a spring in my step every day when I come to work. You have to go about these things. It is an important duty for the board and for me to make sure that we have a team that can take us forward for the next five or 10 years. I think we are doing that in a very thoughtful way.

Okay, that is helpful. Just separately, as we think about the private bank build-out, I guess specifically next year, some of the markets that you are targeting, there has obviously been just a lot of price increases on inflation. As I think about the competitive backdrop for private bankers, that is I think probably increased quite a bit too, as everyone is trying to lean in there. Is it getting harder to do some of these build-outs for kind of those reasons, or is that kind of being balanced by the momentum that you have had? You kind of talked about how the beginning was a little bit harder because you had not really done it before, but as you have built momentum, it is kind of fed on itself. How do those two kind of shake out on a net basis? Thanks.

It's Brendan. We just crashed the three-year anniversary of the private bank. I guess I would start by saying I'm incredibly pleased with where we're at with the foundation that we've built. As the quarters have gone on, our confidence around us having a winning formula has improved remarkably. You see sort of the steady and very significant quarter-on-quarter growth married with the very strong profitability that has held in there every quarter. We still are maintaining the deposit quality of the book even despite the growth. You're starting to see loan growth tick up and the attraction of new talent and teams has not slowed.

As I've mentioned in past calls, the first maybe two years, we were held back intentionally on going really fast on growth to make sure we could demonstrate to ourselves that we could build this model and do it effectively and deliver effectively for our clients while maintaining a profitability profile that's accretive. We feel really good about that now. We are in the mode of expansion. As Aunoy mentioned, we've opened 10 PBOs. We're projecting that to be in the 15-16 range by the end of 2027. We will continue to open and densify in the markets that we're already in. Yes, we're looking and thinking about where else we can bring this model.

I think look no further than some of our core legacy Citizens markets, where we have incredible retail and commercial presence, and we want to round out the three legs of the stool in great markets that we already are operating in with great brand, to connect our OneCitizens model altogether. We will be looking further at expansion. We, in particular, are interested in continuing to bring on top quality wealth teams. We expect the pace of growth to broadly be consistent with where it is today. That's what I think you can expect over the near term and medium-term outlook. We're still going to do it in an incredibly disciplined and paced way as well. We've got to continue to validate that we've got this right. The opportunity is still very much right in front of us.

We believe the white space is still wide open. Clients continue to give us that feedback, that we've got a competitive edge, we're going to continue to walk through that door.

Okay, thank you.

I would just add too, Matt, that we're excited about the expanding PBO presence that we now have 10 up and running. We have seven or so planned for next year. We've done a very thick build-out in California, which you would expect given that was the nexus for First Republic's operations. We see Florida as an area for growth that we'd like to keep investing there to get it caught up in scale somewhat to where California is. The Northeast, we have some satellite opportunities around New York, around Boston to kind of thicken in those regions. I think Philadelphia would be another location that would be on our drawing board. Really excited about kind of the pace and some of the things that are on the drawing board that will help continue and sustain our momentum. Okay.

Thanks.

Do we have another question?

Yes. Our next question comes from John Pancari from Evercore ISI.

Morning.

Go ahead.

Hi.

Morning. Hi. Just on your medium-term targets, I know you reiterated your 16%-18% ROTCE by end of year 2027. Can you just update us on what efficiency ratio is assumed underneath that? I know you had previously cited a mid-50s efficiency ratio. I think the last time you put that in your slides, maybe it was fourth quarter or so. I know you're at 61% for this quarter. How should we think about where that needs to head to in order to support the 16%-18% ROTCE? Thanks.

Hi, John, it's Aunoy here. Look, on the 16%-18% ROTCE, we see quite a good trajectory from here onwards. As you saw, we delivered 13.9% ROTCE this quarter, up from the 12.2%. To your point, efficiency ratio keeps coming down, and it's at 61%. As we go through this year as well as through the quarters of next year, you will see that our efficiency ratio keeps coming down, and it would be probably in the mid-50s range as it's like. We just update the full medium-term guidance at the end of the fourth quarter when we look at the full year itself. That's how we would look at it.

Mid-50s is still the target, John. Just the walk itself gets clearer and clearer as we're counting on a lot of time-based benefit to flow through and to ultimately get us close to the bottom end of the range before we had our own business performance kick in. Call it 14% today. There's roughly another kind of call it 2% from time-based plus fixed asset repricing, which kind of gets you to 16% on its own. You have the business performance, which could be another 150 to 200. You have credit improvement, which can be kind of a smidge higher. Then you have kind of reducing AOCI, which grows the equity base, which you'll still be repurchasing some shares, but that's about a 1% or so negative. Just that alone gets you to the midpoint roughly of the 16%-18%.

You haven't even factored in the benefits from RTB at that point. Anyway, just to kind of pull that walk forward, it's still very consistent, but we've already realized some of the big time-based benefits in pulling us up from kind of the high 11s up to where we are today at 14.

Okay, great. Thanks for the detail there. Just separately, you've already commented a bit on what you're seeing around deposit pricing. What are you seeing around the lending side in terms of loan spreads? Maybe if you can give us a little bit of color by business and maybe what are some of the new money loan yields that you're seeing either in commercial then also in the private bank just as you've been growing that book steadily, what type of new money yields are you seeing there? Thanks.

Yeah. Do you want to go first, Aunoy?

Yeah. I think, John, it's Aunoy here. Look, I think we are very pleased with our loan performance this quarter. If you think about loan growth was up around 3%, $3.8 billion, and it came across all the businesses. Private bank grew nicely.

There was growth in resi mortgage in the utilization of our commercial book there, as well as the multifamily CRE group. On the commercial side, again, a very diverse growth set. Whether we have our sectors that we grew in mid-corporate, we got new clients, new money in. We also saw utilization going up. Our clients are actually quite bullish about the economic environment and put money to work. We also saw sponsor utilization go up. We are very pleased with many of the commercial line utilization that is there. On the retail side, we also saw HELOC going up nicely. Obviously, on spreads, pricing is tight. There is a lot of demand, there is also a lot of money, but we are very disciplined. We look at our overall relationship-based view against the balance sheet that we lend out.

Spreads remain probably stable from last quarter. I am going to go to Ted. You can talk about commercial and then Brendan, maybe a little more color on consumer and private bank.

Thanks. Just adding to what you said, Aunoy, I would say in the second quarter, we saw stable spreads. With the increase in loan issuance out there, we did not see the incredible pricing pressures we had seen earlier last year and early in the first quarter. In the MDI, pricing has kind of leveled off where we had seen more pressure on that earlier on the corporate side of the business. Maybe a little more pressure, but relatively stable to where we have been. As we enter into the third quarter, we have not seen increased pressure on this. I think banks, with the increased amount of loans that have been out there, have been able to be a little bit more choosy and not had the pressure on spreads that we had had in prior quarters. I will pass over to you, Brendan, to talk about consumer.

Yes, sure. Starting on a private bank quickly. Similar story, very stable spreads. Our yields on the loan book is just north of 6%, and the deposit cost is about 210 all in. You are getting at a net loan over deposit spread of just under 4%, which has been really consistent for the past bunch of quarters. Obviously, in the short term, that is very accretive to NII when you look at the net contribution from the private bank. The loan book is about a third, a third, a third residential, commercial real estate, multifamily, granular, tied to high net worth individuals, and then business banking and C&I. No new news there. Strong spreads, accelerating originations, and accelerating deposit growth. No deterioration in quality or margin.

On the retail side, we've been posting year-over-year growth around the 3% range for the last few quarters, led by HELOC and mortgage, with now some modest tick up in credit card, given our new product investments. The yields there also in the low 6s, 615 or so, as compared to a deposit cost in consumer in the 130s. Really healthy margin on the consumer bank. The HELOC yields are north of 7%. The place we're getting the most growth is obviously a variable rate asset with very healthy yields. We're able to take number one in United States market share in the asset class with very low risk profile and very significant outsized yields in that space. We've got a very large competitive advantage there. We're going to keep that going. We don't see that slowing anytime soon.

Thanks for all the detail. Appreciate it.

Sure.

Next, we'll go to the line of Ken Usdin from Autonomous Research. Please go ahead.

Thanks. Good morning. Just on the fee side, I heard your comments in the guide that you could be at towards the high end of the fee guide for the year. I want to know specifically, this is a really good capital markets quarter, I'm just wondering where you think that is in terms of the potential of the business. Obviously, it's a great environment, it certainly reflected that. Could that be the source of potentially some more juice? I guess what other drivers would you expect if you end up doing better than that high end? Thanks a lot.

Well, let me start and flip it to Ted. I'll keep the bar high for Ted. In any case, Ken, if you look at trailing 12-month revenue for cap markets, it's $595 million, so call it $600 million. I think we've built out a lot. We once had a high watermark quarter back in the fourth quarter of 2021, which I think was $181 million.

Yes.

Which annualizes to a number. If you could replicate that, you'd be over $700. Since that time, that was like a perfect storm to the upside of everything trying to get done in a very narrow window in that fourth quarter. If you look at kind of what we've continued to do is we've kind of built out industry verticals with really corporate finance expertise and M&A expertise. We've continued to grow the relationships with private credit. We've bought more boutiques. DH Capital gives us a great advisory group in the digital and data infrastructure space. We just bought another boutique, Matrix Capital Partners. We have continued to build out capabilities. We continue to add talent.

One of the things I'm really pleased about is there's lots of folks that are great bankers who are getting tired of the places they're operating whether it's politics or change in direction, and people are beating a path to our door to get on our platform, which is an enviable position to be in. I think there's clearly continued upside to that number. How much is probably partly on our own execution, but also the market backdrop. From where we sit today the deal pipelines are very strong, and this could be kind of a secular multi-year trend that we'd be very well-positioned and poised to capture that revenue upside, probably better than most of our peers, in my view. Ted, with that, over to you.

Yeah. Thanks, Bruce, and I agree with everything you said. We've built a really, really good engine in our capital markets business. We feel like we have all the products that we want covered now between what we've always had, which is DCM on the bank and bond side, adding equities with JMP back 5 years ago, and then the number of boutiques that Bruce described, with Matrix being the most recent one that we purchased earlier this year. I would say after all that, I don't still feel like we've seen the perfect deal market that would accentuate all of the efforts that we've put into building this. We had a record second quarter this year in DCM, almost our best quarter ever, and I still feel like we did most of those from refinancing transactions versus new underwrites where we generally make more money on those deals.

As we look at our M&A business we've had two good quarters as compared to last year. As we see our pipelines, we feel like there's real upside if the markets remain as strong as they are right now. We are continuing to win, I think, better and much more complex transactions than we had in the past. With the same people, we think we can produce more. As Bruce said, we're seeing a lot of opportunities to bring talent in from other places if we so choose, given changes of strategies that other banks have made, and then what people feel like they can accomplish on our platform. We feel opportunistic that if we get into even a better M&A and leveraged underwriting market than we've had before, there's still upside.

As far as our equities business goes, there's been great combinations now reached between the existing JMP platform and the existing Citizens platform. We're just beginning to see the benefits of that in the REIT space, in the FIG space, where we feel like we can make more money on the equity side than we've made in the past. Again, Bruce has put a pretty high bar out there. I'm not going to commit to that. I do feel like we still have our better days to come on this market as long as the market stays and the geopolitical environment stays relatively calm. Thanks for the question.

All right. Thanks for the color.

Next, we'll go to the line of Dave Chiaverini from Jefferies. Please go ahead.

Hi. Thanks for taking the questions. You mentioned about how the private bank net interest spread is 4%, very strong. Curious about how sustainable this could be as the build-out matures.

I think we've demonstrated that it's sustainable. We're three years in, it's been right around the same range the entire time. Every quarter, we're putting consistently up $1 billion to $1.5 billion plus in net new deposits, and the portfolio composition has not really moved at all. In some cases, it's got a little bit better. We think the model is working and the secret sauce in the model is banking everything connected to the high-net-worth individual, including their business, is driving a healthy portion of the deposit book being operating cash management for the entities that they're connected with. If you were thinking about it just from the standpoint of individuals, you may hypothesize that there's a pinch there on deposits at some point, but because we're banking the entire ecosystem for the client we feel good that it's sustainable going forward.

Great to hear. It was good to see the stress capital buffer improving to the 2.5% minimum. Does this change the way you manage the business at all?

The short answer is no. I'd say the thing we were waiting for to see was a more accurate print. It's been frustrating for various reasons that we ended up with an elevated stress loss result in prior DFAST. Having that now get down to the minimum at 2.5 to me is really step one. I think we should be better than that. There's still some modeling issues that the Fed is addressing. Those models are out for review, and then hopefully once they get approved and finalized, we'll be even better than that. To me, I like to refer to this as tearing the scarlet letter off our jersey to get rid of that result and being an outlier and just getting back into the pack where we always should have been.

One of the other things that Aunoy mentioned in his prepared remarks, we came in kind of number 3 of 10 in our credit losses, which I have more confidence in the way credit is modeled than I did PPNR. Anyway, that's a positive as well. I'd say in terms of where we are in the range still focused on 10 to 10.5. I think that's still where we're not moving those goalposts at this point. A lot has to play out. I think that there's RWA adjustments that are proposed which could be favorable. We'll see how much additional capacity potentially that creates. I tend to philosophically like to operate from a conservative capital position because there's things happen, and if you have that little extra capital cushion, then you can take advantage of things.

Like we were invited in to bid on First Republic, and we were able to take the risk of hiring all the people to start the private bank. In any case, we might move down from kind of the current anchor at 10.5 over time. I don't see in the near term that we'd be revising that 10 to 10.5 range.

Very helpful. Thank you.

Sure.

Next, we'll go to the line of Gerard Cassidy from RBC Capital Markets. Please go ahead.

Hi, Bruce. Hi, Aunoy.

Hey, Gerard.

Aunoy, you said in your prepared remarks, you gave us some color about the growth in the commercial loan portfolio areas like technology, healthcare, energy, FIG sectors. You also mentioned about the private credit funds are actively utilizing your facilities. Can you share with us more about that? Where are you seeing that growth and within the private credit funds? As a second part to the question, you also mentioned about the commercial real estate pay downs. Do you expect that to bottom sometime this year, and we could actually see commercial real estate mortgage growth for Citizens possibly going into 2027?

Hey, Gerard. I'm going to flip that over to Ted. I think he's best positioned on that question.

On the fund financing, Gerard, look, we've had this strategy for years. We've been migrating our fund finance strategy from a participant role to a left lead role. We've been building this pipeline for years now, and in the second quarter, we actually closed on a number of transactions that increased our exposure by, I think, approximately $800 million on fund finance. Those were all left lead transactions, and were part of the strategy that we had put in place. The outstanding to note business continue to be stratified much similarly the way they had been in the past. We don't see a pickup in any one sector. We still feel very, very good about the underlying credits in those areas. We've seen really no deterioration in any way, shape, or form from the underlying assets.

We continue to find it a very good asset class to be in. We saw in a more temporary increase, I think more episodic on our subscription line finance business. I think we were up approximately $600 million in that business over the second quarter. I think that those outstandings I would expect to get repaid over in the short order as the equity comes in and takes out the loans in those deals. On the fund finance side, we had a really good quarter. We've had a really good track record. We feel very good about what we're doing on that side of the business.

CRE, Ted.

On the CRE side, we actually thought we were going to be coming down quicker in that than we did. We had a couple of payoffs that we expected to get done in the second quarter that got pushed out into the third quarter. We're going to continue to not wind down, but we'll continue to be very selective on the office portfolio. I don't know that we'll see that bottom out in the near future on the repayment side. We are, though, continuing to look at digital infrastructure as an opportunity to put some capital to work in the real estate side and on the REIT side of the business where we see good opportunities and we can cross-sell with both our equity business and our bond and bank business. We'll continue to look at those selectively.

Office will continue to go down and may be somewhat offset by some stuff in digital infrastructure and REITs.

I would at the top of the house just say that we'll still have a bias to net shrink through commercial with the offsets that Ted mentions not fully covering the downdraft in office and downdraft in some multifamily that we acquired through the Investors acquisition. When you look over to the private bank, though, we're creating some capacity for them to serve their end client investor base that a lot of folks that are wealthy made their wealth through investing in commercial real estate. We have to have balance sheet available to do selective lending. A lot of that's multifamily, but they never had a credit loss at First Republic, and they haven't had any here in three years, as Brendan mentioned. Really smart lending to great counterparties. Overall, we're kind of probably approaching the bottom across the enterprise.

Eventually that may start to tick up modestly, but we certainly don't see that as a big overall driver of our loan growth going forward.

Very good. Coming back to Ted, you commented about the M&A business. You've had two good quarters compared to last year. You see the pipelines. The Dealogic data is showing record levels of M&A activity. Of course, it's the very large deals with the very large investment banks. What do you think when you look at your prime customer in this space, what is it going to take for more deal activity to really kick in? Because the smaller deals just haven't really gained the momentum like some of these really large mega M&A deals that we've seen in the past 6-12 months.

Yeah, it's a fair point, Gerard. What our pipelines would tell us is that these middle market customers are ready to get off the sidelines. If you looked at the last two Marches where we've had a lot of volatility, we got off to a good start in 2025, expected to have a good pipeline, and then it got delayed with all the concerns around tariffs and things of that nature, which made selling a company a little bit more challenging. Same things happened at the start of 2026, as we look at our pipelines, we're seeing a fair amount of customers in the middle market getting ready to sell. As we talk to our financial sponsors, they are seeing levels of books coming in that they have not seen in the last five years.

It feels like that trend is beginning to pick up, my expectation is into the fourth quarter, into next year, you'll start seeing those M&A transactions start to occur. It feels like with some stability, we should have a good answer to that question toward the end of this year.

Great. I appreciate it, Ted. Thank you. Go ahead, Bruce. Sorry.

No. Good. I was just saying thank you, Gerard.

Okay.

Next, we'll go to the line of Brian Foran from Truist. Please go ahead.

Hey. I actually have a little bit of a follow-up on that last question, maybe more by industry and this kind of overall market debate about narrow economic strength versus broadening across sectors. I guess just to set the stage, for a while, there's been this concern that the business economy is doing well, the drivers by industry are fairly concentrated. I'm looking at your slide 24, which is always great and gives a lot more detail than most of your peers. If I'm mapping it right, it kind of shows that because you've got seven sectors that are flat or down year-over-year, four that are up single digits, and seven that are up double digits in the C&I categories you give.

I guess the question is, do you feel like as you look at your pipelines, as you talk to your customers, are we still on this kind of narrow, concentrated growth path? Do you feel like it's not just AI, it's not just everything related to it, we're really starting to see this broadening theme play out on the ground?

That's a really good question. I would say first, we are starting to see it start to widen out. AI was clearly in a lot in the news and the businesses that surround AI, like digital infrastructure and the stuff that goes into digital infrastructure, has been a big piece of this first and second quarter. As we look at our pipeline, it's not just digital infrastructure. We're seeing a lot of stuff within the industrial subsector start to pick up with things that don't necessarily go into digital infrastructure, which is great. We're seeing some stuff in healthcare. We've seen a pickup in biotech. The only place we really haven't seen a big pickup yet is on the consumer side of the business. Our pipelines look pretty diversified as we look out over the next six to nine months from what we can see.

That was different than what we saw in the first and second quarter, as Gerard picked up on earlier, a lot of the deals were very large transactions. We're getting much more granular in the middle market, which by definition is more granular, is starting to show some real signs of life. Therefore, I expect we will continue to see more granularity in the industries that pick up over the foreseeable future.

Thank you. That was all I had.

Thanks.

Next, we'll go to the line of Manan Gosalia from Morgan Stanley. Please go ahead.

Hey, good morning. Bruce, can you unpack that comment on the CET1 range a little bit? I think you said you're still targeting that 10%-10.5% range, but you think you can move down from that 10.5% number over time. I guess, what do you need to see to get to the lower end of that range? Is it finalization of Basel Endgame? Is it the 2027 stress test? Just trying to assess the trajectory of the capital ratio here.

I'd say a number of things go into the considerations there. One is rating agency, actually. I think the rating agencies coming out of the downdraft in 2023 felt that profitability has weakened and commercial real estate portfolios are problematical to some degree. Until you kind of restore your profitability and until you work through some of your commercial real estate loans, you should hold more capital. I don't take issue with that. I think the whole industry coming out of 2023 actually built their CET1 ratios up to 10.5 or even more. Certainly we're getting to a flex point where profitability is now restored and has momentum to be positive going forward. A lot of the workout on commercial real estate has occurred, and there's been no big surprises there.

You're kind of getting to the point where you can, I think, start to make some decisions as to do I still need to hold as much extra capital for things like this? Then there'll be a whole other consideration around kind of the RWA adjustments that boost your capital in the short run phase in AOCI. To us, it'd be 50 or 60 basis points additional net CET1, I think, by the time that AOCI is fully phased in. Then what do you do with that money? Do the CET1 ratios for the whole industry go up?

By an amount because people still focus on TCE to TA, or do you just say, well, the old calibration was off and this is the new calibration, and so we can use that for loan growth or buying back stock and still manage within the same guide range that we had before. I think just the nature of things mean that I think over time we'll be able to drift down within that range. We won't get out ahead of anybody, but I think there's opportunity to both support our customers with loan growth and be big buyers of our stock, which I never miss a beat on a call to say I think our stock is still good value here. Anyway.

I hear you. That's great context. Maybe just on the NEXT program. You mentioned the financial impact is a benefit to the medium term and doesn't impact the 16%-18% proxy target. Can you just maybe expand on that a little bit? Is there any near-term expenses or anything else we should be thinking about? How are you thinking about the revenue impact of that?

Yeah. I'll start and let Brendan pick up. There, I would say, it's crystal clear to us that we want to get to that 16%-18% range. This is really a 10-year program that we can phase accordingly. I think initially in the short run, we're doing a lot of planning about extricating ourselves out of a lot of the supermarket branches that we have and how do we set up standalone branches, full service branches nearby that we can migrate the customers to that branch and not be a full de novo, but actually be in a much better position to grow and add customers. There's some of that. That's probably more in the planning stage in the short run. Adding people, adding specialists.

Looking at the branches where there's the biggest opportunities to grow small business, put small business specialists in place to penetrate the wealth opportunity, put wealth specialists in place. We can, I think, make those investments in people and they'll have very quick paybacks. We've already piloted this in select branches, and we can see that those really aren't a drag, and they're actually positive very quickly. Anyway, that's kind of the frame. What do we win if we win is kind of the big question over the 10-year period. I think what we're trying to accomplish is faster household growth and mainly faster deposit growth, attractive low-cost deposit growth, which if you kind of play out your retail and small business deposit franchise should grow roughly at GDP.

If you can add 2% to that growth rate through this program, that's a meaningful amount of deposits over a 10-year period. That's $20 billion-$30 billion of incremental attractive deposits. That's what this program is designed to do. How we invest in it and the pace of investment will be informed by, let's get into the range and let's not start investing too heavily until we're in the range. We'll have RTB kicking in, which could allow us some acceleration opportunities if we choose to do that. That's how we think about it. Brendan, anything to add?

Well, just a few quick points. Just grounding on where we're at today. If you looked at our branch network when we took the bank public and then added investors in ISBC to that, we would have had about 1,400 branches. Today we have kind of call it 1,000, squiggly line 1,000. We now have one of the more profitable and effective branch networks in the country where if you look at revenue to expense ratios, we're at 5 to 6 to 1. The industry is at 3 to 4 to 1. We've got a really profitable and efficient network. If you look out 5 to 7 years, we actually don't imagine our branch count to net change by a tremendous amount. It should be sort of in that range of plus or minus 1,000 branches.

When you unpack the various different things that we're doing to accelerate long-term outsized retail deposit growth, our legacy markets, ex Metro N.Y., really this is about repositioning them for strength and even further growth. It actually could mean slightly less branches because we have this glut of in-store branches that we could thin over time and replace with even more powerful branches that you get sort of a 2-for-1 trade in terms of the strength, and it better positions us for our target segments of mass affluent and affluent customers, which gear better to where the profitability of the retail business is over time, where you can get more wallet share, really where our strengths are, home equity, wealth, so on and so forth.

There'll be some self-funding dynamics in our legacy markets that allow us to selectively and organically slowly plant some de novos and densify some of our other markets that we're a little thin in. The combination of those factors should drive a more powerful network, more equipped for the target customers we're going at with a number of self-funding mechanisms. Then to Bruce's point, where we're adding people, they're high-quality advisory folks, wealth, private client bankers, business bankers. Those have really quick paybacks where you're going to see the revenue growth coming soon, and that's something we've validated over a long period of time.

Thank you. Really appreciate all the detail.

Sure.

Next, we'll go to Dave Rochester from Cantor Fitzgerald. Please go ahead.

Hey, good morning, guys. Solid quarter. I wanted to go back to the Private Bank. You've seen some really good momentum in that segment. It continues to exceed growth expectations. I was wondering, as you look out to next year, assuming your PBO build-outs are on time, you're able to source the good people that you want for those offices. Do you think if this higher growth trajectory continues, there's a better chance you're going to land closer to the upper end of that 16%-18% ROTCE target by the end of the year? Or 2027, rather. Are you thinking that upper half of the range maybe is more reasonable at this point?

Yeah. I would not pin where we are in the range just to that. I think there's a number of factors that go into where we land in the range. The kind of net interest income development is very significant there. We already have pretty high ambition for Private Bank. I think we've demonstrated what I'm most proud of here really is we're not just growing it, but we're growing it in a prudent, controlled fashion and getting excellent growth. We're managing the returns in the business so that we're getting roughly a 25% return on equity in the business, which as that continues to grow, it's just pulling the ROE for the overall enterprise higher.

You're right to say that should be something that lifts, but I think it's a little early to say there's enough upside in our mindset and view on Private Bank that we can commit to that's going to pull us to the upper end of the range, Dave.

Okay. Fair enough. Bruce, you mentioned earlier Florida is maybe the next market you selected for greater density. How would you compare the potential value out of that market fully built out with all the PBOs you plan, versus the California market where you already have a lot of density and have a sense for the value you're expecting there? How meaningful could Florida be for you, and what's the timeline for getting that density you want up and running?

I'd say, Brendan, you can add to this, California was the natural place for the build-out because First Republic really dominated that market, Northern Cal and Southern Cal. We've kind of replicated that in a significant way. Not only that, we did it bringing in very strong commercial banking teams, which really First Republic didn't have. We have JMP based in San Francisco, so we have a whole investment bank focused on emerging tech and other kind of emerging growth areas of the economy. We're quite strong and quite built out there.

I think Florida in comparison, what's really attractive to us is as a principal East Coast bank with our kind of retail and business bank footprint, there's a lot of migration kind of out of the Northeast or people who kind of live part of the time in the Northeast and part of the time in Florida. It's a very fast-growing economy in Florida. To participate in that, to serve existing customers and leverage our networks, it's a great opportunity. Again, staying focused with a similar playbook at the high end of the market, more PBOs, more private bankers. We have already hired a very strong commercial banking team in that market. Kind of getting that OneCitizens dynamic going in Florida the way we have it in California is very attractive to us.

We feel like we can't miss as long as we get the right people in place. I think it's going to take a while though, to your point. I don't think we'll be California-like for five to seven years. Brendan, you can call me on that, just off the top of my head, to gradually open the right private banking locations, to hire the right people, to get our name well known in Florida, I think it's going to take a little while. To me, the opportunity is really immense.

Yeah. Not a ton to add. It would be the exact same playbook in Florida that we're doing in California. We're one or two steps behind in terms of pace in Florida than we are in California. It is just as strategic as California, it will probably ultimately be a little bit smaller in the private banking space, at least in Florida than California long term. You can imagine, right now our presence in private banking in Florida is centered right around Palm Beach and West Palm Beach. You can imagine over the five-year horizon that we're in five or six of the affluent communities in Central and Southern Florida. That's our aspiration. We're just getting situated in Palm Beach, we'll start to put in the same playbook that we did in California into Florida over the next couple of years.

Sounds good. All right. Thanks, guys.

Thanks.

Next, we'll go to the line of Chris McGratty from KBW. Please go ahead.

Great. Thanks for fitting me in. Bruce, on the private bank, you got kind of a medium term. Are you more optimistic about growing the loans or the deposits for this business? I ask it because your loan-to-deposit ratio has roughly been around 50%. Anything magical about that number? Thanks.

No. I'd say what's interesting is a lot of folks thought that First Republic built the business based on giving away cheap credit. That's how they got people in the door. I think we turned that script upside down that eventually the offering that First Republic had was kind of white glove service, unparalleled banking experience, and we can handle all your banking needs, deposits, investments, and Not loans, but in a higher rate environment and with a lot of those mortgages now sitting on JP Morgan's books, there wasn't the same demand for lending. What we're really pleased about is that the strength of the relationships of the private bankers has allowed customers to come over and they trust the bankers, they trust our platform, they find it attractive.

We've led with deposits and investments and we're only of late starting to see the loan demand pick up. I would think that over time, we want to stay with that formula. Deposit's very attractive. Investment's off balance sheet. Fee revenue's very attractive. Loans attract capital, but you've got to have a balance sheet, you've got to support your customers for their needs. I think we could probably settle into a 60%-70% kind of LDR as kind of where the ultimate kind of framework will sit for the private bank. That means there's going to be some catch up loan growth. Some of those mortgages are going to need to be refinanced. There'll be more loan demand there. As we really focus on the business sector and PEVC companies, I think there'll continued growth there.

As the deal flow cycle picks up, there'll be more line utilization and things like that. I do think there's a little bit of momentum at this point behind loans, but I don't see it really getting to something that exceeds 70%.

The only thing I would add is if you think about it from a balance sheet strategy standpoint, the private bank right now is a net liquidity contributor to the top of the house. If you look at the lendability of the deposits, it's strong in between 60%-70%, and we're lending at 50%. As that tightens a little bit to Bruce's point and get into the LDR of 60%-70%, I think that would be spot on the top of sort of a self-funding dynamic in the private bank where it's not drawing down liquidity from retail or anything else. It's still self-funding. I expect that to continue into the medium term.

Right.

Perfect. Thank you. Then more of a modeling question. The earning asset growth linked quarter Q1 to Q2. Any reason that wouldn't be about the same for next quarter? Thanks.

Yeah. It's on here. I would say think about it. It depends on how deposit growth goes, how loan growth comes in. I don't think it should change that much. If you look at our full-year guide on lending or average lending asset growth, we are in the range on that side.

Although I would say that there was a bit of pull forward on loan growth for reasons we've talked about earlier in the call that kind of kept it a bit higher. You could just look at the NII guide in Q3, and it's a little less. It's 2.5% to 3.5%, and we printed over 4% this quarter. Anyway, it will reflect that dynamic that I think loan growth is a little less. That's for a number of reasons. Ted talked about the private capital, and we talked about CRE repayments coming in in Q3. Those are some of the factors to consider.

Great. Thanks so much.

Yep.

Thank you. For our final question, we'll go to the line of Matthew Breese from Stephens. Please go ahead.

Good morning. Thanks for taking my questions. Just to follow up there. Should we infer from your comments particularly around the NII guide that loan growth for the year will be above kind of your 2026 guide? Just curious to what extent. Bruce, I know you just discussed some offsets there, I'm curious on the whole.

Yeah. Go ahead, Aunoy.

Yeah. I would say if you think about it, we had some good loan growth this quarter, it was a pull forward, as Bruce mentioned. If you take the average of the loan growth, that's what we for the full year, I think we will probably slightly be ahead of what we had guided in January. I think spot loan growth will depend on how fourth quarter ends, et cetera. I would say on the average side, we would be slightly ahead versus our January guide.

Yeah. That's a good point, Aunoy, is that the average was bolstered by having more loan growth earlier in the year. I'm not sure that the spot changes a huge amount. When you think about how do we get to the high side and above the high side of the range, that volume is a big driver of that. I think that we said that we thought that the NIM would approach 325. That's still a check. Really having more loan growth in the first half of the year is very helpful to drive NII higher.

Got it. Thinking about the margin longer term, Anuj, when you model it out, how much longer might we see fixed asset repricing benefits to the NIM? I'm particularly focused on 2028, just given if you roll the clock back five years, in 2023, we saw kind of loan yield spike for the industry. Thinking we start to roll out of some of those in 2028, I'm curious if you see that in your model as well and what the impacts might be.

Yeah. I think if you look at it in 2027, as we put it in the guide page, if you think of it, we still got a basis point or so in the quarter. It goes up. It obviously depends on the steepness of the curve. Generally, what we see is roughly $3 billion to $5 billion between securities and loans getting repriced. It generally comes at a spread of 60 to 75 basis points. I think that will continue in 2027. In 2028, as we go through it, obviously some of the repricing, the volume starts to come down. I would say it will still continue into 2028.

Yeah. Probably at reduced levels.

At reduced levels. Yeah.

Yeah.

I'll leave it there. Thanks for taking my questions.

Sure. Okay.

That was our final question.

I think that brings us to the end of the questions. Appreciate everybody dialing in today and your interest and support. Everybody have a great day. Take care.

That concludes today's conference call. Thank you for your participation. You may now disconnect.